The Central Bank of Nigeria (CBN) has restated its stance on how banks can utilize their foreign exchange (FX) revaluation gains, referring to a previous circular issued on September 11, 2023.
The CBN emphasized that FX revaluation gains should be used as a buffer to cushion against significant movements in the FX rate and should not be used for dividend payments or operating expenses.
In a statement, the CBN said, "Banks are required to exercise utmost prudence and set aside FCY revaluation gains as a counter-cyclical buffer to cushion any adverse movement in the FX rate. In this regard, banks shall not utilize any such revaluation gains to pay dividends or meet operating expenses."
Background
Following the revaluation of the naira in June, Nigerian banks reported significant profits in their semi-annual financial results, largely attributed to the naira's depreciation. This prompted the CBN to issue the directive mentioned above in September.
The depreciation of the naira resulted in a notional increase in the banks' balance sheets in naira terms, reflecting their foreign exchange holdings.
The CBN is concerned that these increased profits may lead to expenditures that could expose banks to risk if the exchange rate appreciates.
Policy Implications
Banks are advised not to allocate the additional earnings from foreign currency (FCY) revaluation towards dividends or operational costs. Instead, they should reserve these funds to cover potential future deficits in case the exchange rate declines, a strategy known as a counter-cyclical buffer.
Banks that have exceeded the permissible lending threshold to a single borrower due to the FCY policy may seek approval from the CBN to maintain the excess loan. This exemption, known as forbearance, means the CBN will not impose penalties for surpassing the lending limit, provided the loans were established before the implementation of the policy.
No comments:
Post a Comment